CHAPTER 15—Solutions
MANAGERIAL ACCOUNTING AND COST CONCEPTS
Discussion Questions
DQ1. Management accountants partner with management in decision making, devising
planning and performance management systems to assist management in the formulation and implementation of an organization’s strategy. Managers trust the
numbers management accountants provide are accurately measured and recognized by the appropriate cost classifications.
DQ2. The statement is true. Several parts of a management accountant's work, such as
product costing and pricing analyses, feed directly into the financial accounting
system. Because the two fields are interrelated, management accountants and financial accountants must work closely together. Budget data must be compatible
with the organization's records or data accumulation system so that projected and
actual operating results can be compared and differences can be analyzed. Reports
to outsiders, although usually audited or viewed by outside public accountants, are
created by and are the responsibility of the organization's financial accountant. Tax
aspects of the organization affect management accounting as well as financial accounting projects and analyses. Therefore, it is impossible to distinguish where financial accounting ends and managerial accounting begins. As financial and management accounting work is done, the underlying accounting concepts are the
same that guide the accountants work.
DQ3. Management accountants now act as business partners in management decision
making, which is a broader role than the one indicated by the previous definition.
DQ4. The product unit cost can be measured using the actual, normal, or standard costing method. Under actual costing, the actual costs are used to compute the product
unit cost. Under normal costing, the actual costs of direct materials and direct labor
are combined with the estimated cost of overhead to determine the product unit
cost. Under standard costing, the estimated costs are used to calculate the product
unit cost.
DQ5. Managers in manufacturing, retail, and service organizations recognize, measure,
and match cost and revenue data during the period to plan, perform, evaluate, and
report on operating costs and product or service costs to prepare budgets, make
pricing and other decisions, calculate variances between estimated and actual
costs, and communicate results.
15-1
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Short Exercises
SE1. Managerial Accounting versus Financial Accounting
a.
b.
c.
d.
MA
FA
FA
MA
e.
f.
g.
h.
FA
MA
MA
MA
e.
f.
g.
O, CC
N, N
O, CC
SE2. Elements of Manufacturing Costs
a.
b.
c.
d.
DM, PC
O, CC
DL, PC and CC
O, CC
SE3. Cost Recognition
a.
b.
c.
ID, F, NVA, PD
Neither, F, NVA, PER
D, V, VA, PD
SE4. Cost Flow in a Manufacturing Organization
Materials Inventory, ending balance:
Materials Inventory, beginning balance
Direct materials purchased
Direct materials placed into production
$ 25,000
85,000
(74,000)
Materials Inventory, ending balance
$ 36,000
Work in Process Inventory, ending balance:
Work in Process Inventory, beginning balance
Direct materials placed into production
Direct labor costs
Overhead costs
Cost of goods manufactured
$
5,750
74,000
70,000
35,000
(133,000)
$ 51,750
Work in Process Inventory, ending balance
Finished Goods Inventory, ending balance:
Finished Goods Inventory, beginning balance
Cost of goods manufactured
Cost of goods sold
$ 38,000
133,000
(103,375)
$ 67,625
Finished Goods Inventory, ending balance
15-2
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SE5. Document Flows in a Manufacturing Organization
a.
b.
c.
d.
Time card
Purchase order
Receiving report
Job order cost card
e.
f.
g.
Materials request
Purchase request
Sales invoice
SE6. Income Statement for a Manufacturing Organization
Nathan Company
Income Statement
For the Year
Sales
Cost of goods sold:
Finished goods inventory, beginning
Cost of goods manufactured
Cost of finished goods available for sale
Less finished goods inventory, ending
Cost of goods sold
Gross margin
Operating expenses
$900,000
$ 45,000
575,000
$620,000
80,000
540,000
$360,000
300,000
$ 60,000
Operating income
SE7. Computation of Product Unit Cost
Product unit cost:
Direct materials
Direct labor
Overhead
(
(
(
$4,800
$7,200
$3,600
/
/
/
600 units )
600 units )
600 units )
Product unit cost
(
$15,600
/
600 units )
$ 8.00
12.00
6.00
$26.00
Prime costs and conversion costs per unit:
Prime
Costs
Conversion
Costs
Direct materials
Direct labor
Overhead
$ 8
12
NA
$12
6
Totals
$20
$18
NA
SE8. The Management Process
a.
b.
c.
C
PL
PE
d.
e.
f.
PE
PL
E
15-3
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SE9. Strategic Positioning
a.
b.
c.
d.
e.
f.
g.
h.
i.
Q
Q
C
Q
C
C
Q
Q
C
SE10. Ethical Conduct
ABC's accountant may be disclosing confidential information to a person employed by
a competitor; therefore, he is not adhering to the ethical standards of management
accountants.
15-4
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Exercises: Set A
E1A. Cost Recognition
Cost Recognition Classifications
Example: Motor
a.
Office rent
b.
Labor to assemble moped
c.
Labor to inspect moped
d.
Accountant's salary
e.
Lubricant for brakes
Product
or Period
Variable
or Fixed
Value-Adding or
Non-Value-Adding
Direct
or Indirect
Product
Period
Product
Product
Period
Product
Variable
Fixed
Variable
Variable
Fixed
Variable
Value-adding
Non-value-adding
Value-adding
Non-value-adding
Non-value-adding
Value-adding
Direct
—
Direct
Indirect
—
Indirect
Note to Instructor: Office rent and accountant's salary are not product costs. Therefore, they
would not be traceable to the mopeds in a traditional business operation. The two costs would
be shown on the income statement as selling and administrative expenses.
E2A. Comparison of Income Statement Formats
a.
b.
c.
SER
RET
MANF
E3A. Characteristics of Organizations
a.
b.
c.
d.
e.
RET
SER
RET
MANF
MANF
f.
g.
h.
i.
SER
RET
SER
MANF
15-5
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E4A. Statement of Cost of Goods Manufactured
Agron, Inc.
Statement of Cost of Goods Manufactured
For the Month of June
Direct materials used:
Materials inventory, beginning
Direct materials purchased
Cost of direct materials available for use
Less materials inventory, ending
Cost of direct materials used
Direct labor ( 3,400 hours ×
$10 )
Overhead:
Utilities
Supervision
Indirect materials
Depreciation
Insurance
Miscellaneous
Total overhead
Total manufacturing costs
Add work in process inventory, beginning
Total cost of work in process during the month
Less work in process inventory, ending
$ 48,600
119,000
$167,600
55,100
$112,500
34,000
$
5,870
17,300
6,750
6,200
1,830
1,100
39,050
$185,550
55,250
$240,800
48,400
$192,400
Cost of goods manufactured
E5A. Statement of Cost of Goods Manufactured and Cost of Goods Sold
Lime
Division
Lemon
Division
Orange
Division
Fig
Division
Direct materials used
Direct labor
Overhead
Total manufacturing costs
Beginning work in process inventory
Ending work in process inventory
Cost of goods manufactured
Beginning finished goods inventory
Ending finished goods inventory
$ 4
2
5
$ 7
9
3
$ 5
4
3
(g)
$ 8
4
5
$12
5
(2)
(h)
Cost of goods sold
$13
$11
2
(1)
(a)
(b)
$12
3
(2)
$19
7
(3)
$23
4
(6)
(c)
$21
(d)
(e)
(f)
$15
5
(4)
$16
(i)
$17
2
(5)
$14
7
(9)
(j)
(k)
(l)
$12
E6A. Missing Amounts—Manufacturing
a.
$1,000 + $20,000
– $15,000
=
$
6,000
b.
$140,000 + $60,000
– $55,000
=
$145,000
c.
$23,000 + $99,000
– $29,000
=
$ 93,000
15-6
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E7A. Inventories, Cost of Goods Sold, and Net Income
Note to Instructor: Items are listed in the suggested order of working solution.
1.
First Quarter:
(a)
Gross Margin =
=
(c)
Operating
=
Expenses
=
(d)
Cost of Goods
=
Available for Sale
=
(b)
Net Cost of
=
Purchases
=
Sales
−
Cost of Goods Sold
$10
−
$5
Gross Margin
−
Operating Income
$5
−
$3
Cost of
Goods Sold
+
Ending
Merchandise
Inventory
$5
+
$5
Cost of Goods
Available for Sale
−
Beginning
Merchandise
Inventory
$10
−
$4
Gross Margin
+
Cost of
Goods Sold
$4
+
$8
Cost of Goods
Available for Sale
−
Cost of
Goods Sold
$12
−
$8
Cost of Goods
Available for Sale
−
Net Cost of
Purchases
$12
−
$7
=
$5
=
$2
=
$10
=
$6
=
$12
=
$4
=
$5
Second Quarter:
(e)
Sales =
=
(f)
Ending
Merchandise =
Inventory
=
(g)
Beginning
Merchandise =
Inventory
=
15-7
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E7A. Inventories, Cost of Goods Sold, and Net Income (Continued)
Third Quarter:
(h)
Beginning
Merchandise =
Inventory
=
(i)
Operating Income =
=
(j)
Cost of
=
Goods Sold
=
Cost of Goods
Available for Sale
−
Net Cost of
Purchases
$15
−
$11
Gross Margin
−
Operating Expenses
$5
−
$1
Sales
−
Gross Margin
$15
−
$5
Operating
Expenses
+
Operating Income
$4
+
$2
Gross Margin
+
Cost of
Goods Sold
$6
+
$12
Cost of Goods
Available for Sale
−
Cost of
Goods Sold
$15
−
$12
Cost of Goods
Available for Sale
−
Beginning
Merchandise
Inventory
$15
−
$5
=
$4
=
$4
=
$10
=
$6
=
$18
=
$3
=
$10
Fourth Quarter:
(l)
Gross Margin =
=
(k)
Sales =
=
(m)
Ending
Merchandise =
Inventory
=
(n)
Net Cost of
=
Purchases
=
15-8
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E7A. Inventories, Cost of Goods Sold, and Net Income (Continued)
2.
First Quarter:
Sales =
(c)
=
(a)
Ending
Finished Goods =
Inventory
=
(b)
Beginning
Finished Goods =
Inventory
=
Gross Margin
+
Cost of
Goods Sold
$4
+
$6
Cost of Goods
Available for Sale
−
Cost of
Goods Sold
$8
−
$6
Cost of Goods
Available for Sale
−
Cost of Goods
Manufactured
$8
−
$5
Sales
−
Cost of
Goods Sold
$10
−
$3
Gross Margin
−
Operating Income
$7
−
$3
Cost of
Goods Sold
+
Ending
Finished Goods
Inventory
$3
+
$3
Cost of Goods
Available for Sale
−
Beginning
Finished Goods
Inventory
$6
−
$2
=
$10
=
$2
=
$3
=
$7
=
$4
=
$6
=
$4
Second Quarter:
(f)
Gross Margin =
=
(g)
Operating
=
Expenses
=
(d)
Cost of Goods
=
Available for Sale
=
(e)
Cost of Goods
=
Manufactured
=
15-9
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E7A. Inventories, Cost of Goods Sold, and Net Income (Concluded)
Third Quarter:
(j)
Gross Margin =
=
(k)
Sales =
=
(h)
Ending
Finished Goods =
Inventory
=
(i)
Cost of Goods
=
Manufactured
=
Operating
Expenses
+
Operating Income
$4
+
$2
Gross Margin
+
Cost of
Goods Sold
$6
+
$5
Cost of Goods
Available for Sale
−
Cost of
Goods Sold
$10
−
$5
Cost of Goods
Available for Sale
−
Beginning Finished
Goods Inventory
$10
−
$3
Cost of Goods
Available for Sale
−
Cost of Goods
Manufactured
$13
−
$8
Gross Margin
−
Operating
Expenses
$7
−
$5
Sales
−
Gross Margin
$14
−
$7
=
$6
=
$11
=
$5
=
$7
=
$5
=
$2
=
$7
Fourth Quarter:
(n)
Beginning
Finished Goods =
Inventory
=
(m)
Operating Income =
=
(l)
Cost of
=
Goods Sold
=
15-10
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E8A. Unit Cost Determination
Total
Cost
Unit Cost
( Total / 6,264 )
Total direct materials costs
Total direct labor costs
Total overhead costs
$25,056
12,528
21,924
$4.00
2.00
3.50
Total production costs
$59,508
$9.50
1.
Cost Items
2.
The price for a bottle of wine should be increased to at least $12.67* per bottle. The
current price barely covers the production costs. Very little is left over for profit and
other operating costs, such as selling and administrative expenses.
*[$9.50 / (1 – 0.25)] = $12.67 rounded
Prime
Cost
Conversion
Cost
Direct materials
Direct labor
Overhead
$4.00
2.00
NA
NA
$2.00
3.50
Totals
$6.00
$5.50
3.
E9A. Unit Costs in a Service Business
Gas
Tractor maintenance
Tractor depreciation (
Labor
$3,000
/
12
$ 900
360
250
1,200
months )
$2,710
Total costs
Cost per bale
=
$2,710
/
6,000
bales
=
$0.45 *
Revenue per bale
=
$3,600
/
6,000
bales
=
$0.60
*Rounded
The business is currently covering costs and making an adequate gross profit (25%). No
need to increase the amount charged to customers if business is satisfied with profits for
the year or if they obtain profits from other farming services. However, to increase profits,
it may either increase the service charge to customers or reduce some of operating expenses. This also assumes that business activities are steady throughout the year and not
seasonal or cyclical. If, for instance, the tractor generates revenue only four months of the
year, the depreciation expense allocation would increase to $750 ($3,000 × 1/4).
15-11
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E10A. The Management Process
a.
b.
c.
d.
e.
PE
E
PL
C
PL
f.
g.
h.
i.
j.
C
PE
PL
C
PE
5.
6.
7.
mission
tactical objectives
strategic objectives
E11A. The Planning Framework
1.
2.
3.
4.
budget
operating objectives
goal
business plan
E12A. Ethical Conduct
Dula Gibbon is in a delicate situation. The ethical issue is one of professional competence.
Her boss is violating the ethical standard that requires management accountants to maintain an appropriate level of professional competence through ongoing development of
their knowledge and skills.
Gibbon has three choices. She can choose to do nothing. However, since Paine's actions
can affect the security of company activities, Gibbon is ethically obligated to do something
about the situation. Thus, she can either (1) approach Paine and urge him to reconsider
his thoughts and actions regarding professional development or (2) report his actions to
someone higher in the organization. Paine's actions constitute employee theft of services
because he is receiving a salary and travel, lodging, and meal expenses for personal
pleasure instead of work-related activity. As is the case with so many ethical dilemmas,
there is no easy solution for Gibbon. If Paine does not remain competent, management
should be informed.
E13A. Corporate Ethics
Depending on the company selected, each student's description will vary. For example,
some companies, such as Lockheed Martin, state their ethical principles on their website
(www.lockheedmartin.com) and provide ethics awareness training, diversity dialogues,
integrity minutes, ethics links, ethics tools, and other resources. Other companies, such
as Nokia, not only have a code of corporate responsibilities but also provide information
about the environmental attributes of its products and how it is being a good corporate
neighbor wherever it does business. Students' conclusions about corporate ethical conduct should be supported by their findings.
Note to Instructor: Solutions for Exercises: Set B are provided separately on the Instructor's
Resource CD and website.
15-12
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Problems
P1. A Manufacturing Organization’s Balance Sheet
1.
2.
a.
The asset accounts on the balance sheet of Manufacturing Company that are
specifically related to manufacturing organizations include Materials Inventory,
Work in Process Inventory, Finished Goods Inventory, Factory Supplies, Small
Tools, Factory Building, Accumulated Depreciation—Factory Building, Factory
Equipment, Accumulated Depreciation—Factory Equipment, and Patents.
b.
The balance sheets of both manufacturing and retail organizations include
amounts for Cash, Accounts Receivable, Accounts Payable, Insurance Premiums
Payable, and Income Taxes Payable. More complex organizations of either type
will usually have Land, Mortgage Payable, Common Stock, and Retained Earnings. The nature and amounts of these items will vary depending on the resource
needs of each organization.
a.
b.
c.
=
Operating
Expenses
$ 53,670
=
$191,800
Gross Margin =
Operating Income
+
$138,130
Cost of
=
Goods Sold
=
Sales
−
Gross Margin
$500,000
−
$191,800
=
$308,200
Cost of Goods
=
Available for Sale
=
=
d.
+
Cost of Goods
=
Manufactured
=
=
Cost of
Goods Sold
$308,200
+
+
Finished Goods
Inventory, Ending
$54,800
$363,000
Cost of Goods
Available for Sale
$363,000
−
−
Finished Goods
Inventory, Beginning
$50,900
$312,100
15-13
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P2. Statement of Cost of Goods Manufactured
Jackplum Vineyards
Statement of Cost of Goods Manufactured
For the Year Ended October 31
Direct materials used:
Materials inventory, beginning
Direct materials purchased
Cost of direct materials available for use
Less materials inventory, ending
Cost of direct materials used
Direct labor
Overhead:
Depreciation, plant and equipment
Indirect labor
Property tax, plant and equipment
Plant maintenance
Small tools
Utilities
Employee benefits
Total overhead
Total manufacturing costs
Add work in process inventory, beginning
Total cost of work in process during the year
Less work in process inventory, ending
$ 56,200
750,000
$806,200
83,800
$ 722,400
1,540,000*
$ 85,600
207,300
96,000
80,000
42,400
96,500
176,100
783,900
$3,046,300
3,300,000
$6,346,300
2,700,500
$3,645,800
Cost of goods manufactured
* 140,000 hours × $11/hour = $1,540,000
15-14
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P3. Computation of Unit Cost
1.
Department 70:
Direct materials used:
$30,000
Direct labor:
/
10,000 fans
$3.00
$8,000
Overhead:
/
10,000 fans
0.80
$5,000
/
10,000 fans
Total unit cost, Dept. 70
0.50
$4.30
Department 71:
Direct materials used:
$4,000
Direct labor:
/
10,000 fans
$0.40
$2,000
Overhead:
/
10,000 fans
0.20
$3,000
/
10,000 fans
Total unit cost, Dept. 71
0.30
2.
Total unit cost
3.
Selling price
0.90
$5.20
Unit cost
$10.00
5.20
Gross margin per unit
$ 4.80
Gross margin as a percentage of sales:
0.48
or
48.0%
The selling price appears adequate. Almost 50% of the total selling price remains
to cover all operating expenses and to yield a profit. Management should be sure
to supply cost data to the Sales Department on a timely basis.
Department 70
4.
Prime
Costs
Direct materials
Direct labor
Overhead
Totals
Conversion
Costs
Department 71
Prime
Costs
Conversion
Costs
$3.00
NA
$0.40
NA
0.80
$0.80
0.50
0.20
$0.20
0.30
NA
$3.80
$1.30
NA
$0.60
$0.50
15-15
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P4. Unit Costs in a Service Business
1. Cost per patient day:
Memory aids
Doctors' care
Memory therapy care
Regular nursing care
Medications
Daily living supplies
Room rental
Food services
$
(
(
(
×
×
×
1
3
24
)
)
)
$200
$ 90
$ 30
30
200
270
720
250
80
400
50
$2,000
Total cost per patient day
2. and 3. Billing per patient day:
Cost
Memory aids
Doctors' care
Memory therapy care
Regular nursing care
Medications
Daily living supplies
Room rental
Food services
Totals
4.
$
30
200
270
720
250
80
400
50
2. Normal
Billing
×
×
×
×
×
×
×
×
1.40
1.40
1.40
1.40
1.40
1.40
1.40
1.40
$2,000
3. Industry Average
Billing Approach
$
42
280
378
1,008
350
112
560
70
$2,800
×
×
×
×
×
×
×
×
1.30
1.50
1.50
1.50
1.50
1.50
1.30
1.20
$
39
300
405
1,080
375
120
520
60
$2,899
On the surface, the new approach seems to yield more revenue. However, the rates used
to compute the new cost per patient day were industry averages. They may not be representative of Sunny Day's immediate competition. Before adopting the new rate, the controller should compare it to rates charged by other memory units in the area.
15-16
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P5. Professional Ethics
1.
2.
Ted Thalia is facing an issue of integrity, not one of confidentiality. Two ethical standards come into play:
●
Refuse any gift, favor, or hospitality that would influence or would appear to influence your actions.
●
Communicate unfavorable as well as favorable information and professional judgments or opinions.
Thalia is ethically bound to report the write-off of the obsolete inventory in the year
that the inventory became worthless. He should make this decision and support it
with both professional and ethical reasoning. Since his boss is also an accountant,
the same ethical standards apply to his work and judgment. Under no circumstances
should the obsolete inventory be reported in a subsequent accounting period.
Note to Instructor: Other standards of integrity can also be brought into the discussion of
this case.
15-17
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Alternate Problems
P6. A Manufacturing Organization’s Balance Sheet
1.
2.
a.
The asset accounts on Miles Production Company's balance sheet that are specifically related to manufacturing organizations include Materials Inventory, Work
in Process Inventory, Finished Goods Inventory, Production Supplies, Small Tools,
Factory Building, Accumulated Depreciation—Factory Building, Production Equipment, Accumulated Depreciation—Production Equipment, and Patents.
b.
The balance sheets of both manufacturing and retail organizations include amounts
for Cash, Accounts Receivable, Accounts Payable, Insurance Premiums Payable,
and Income Taxes Payable. More complex organizations of either type will usually
have Land, Mortgage Payable, Common Stock, and Retained Earnings. The nature
and amounts of these items will vary depending on the resource needs of each
organization.
a.
b.
c.
d.
Operating
Expenses
+
Operating Income
=
$40,000
+
$68,000
=
$108,000
Sales
−
Gross Margin
=
$450,000
−
$108,000
=
$342,000
Cost of
Goods Sold
+
Finished Goods
Inventory, Ending
=
$342,000
+
$70,000
=
$412,000
Cost of Goods
Available for Sale
−
Finished Goods
Inventory, Beginning
=
$412,000
−
$60,000
=
$352,000
Gross Margin =
Cost of
=
Goods Sold
Cost of Goods
=
Available for Sale
Cost of Goods
=
Manufactured
15-18
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
P7. Statement of Cost of Goods Manufactured
Reggi Vineyards
Statement of Cost of Goods Manufactured
For the Year Ended October 31
Direct materials used:
Materials inventory, beginning
Direct materials purchased
Cost of direct materials available for use
Less materials inventory, ending
Cost of direct materials used
Direct labor
Overhead:
Depreciation, plant and equipment
Indirect labor
Property tax, plant and equipment
Plant maintenance
Small tools
Utilities
Employee benefits
Total overhead
Total manufacturing costs
Add work in process inventory, beginning
Total cost of work in process during the year
Less work in process inventory, ending
$2,156,200
6,750,000
$8,906,200
1,803,800
$ 7,102,400
1,168,500 *
$ 685,600
207,300
94,200
83,700
42,400
96,500
76,100
1,285,800
$ 9,556,700
3,371,000
$12,927,700
2,764,500
$10,163,200
Cost of goods manufactured
* 142,500 hours × $8.20 = $1,168,500
15-19
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
P8. Computation of Unit Cost
1.
Department 60:
Direct materials used
$29,440 /
4,000 discs
Direct labor
$6,800
/
4,000 discs
Overhead
$7,360
/
4,000 discs
Total unit cost, Dept. 60
$7.36
1.70
1.84
$10.90
Department 61:
Direct materials used
$3,920
/
4,000 discs
Direct labor
$2,560
/
4,000 discs
Overhead
$4,800
/
4,000 discs
Total unit cost, Dept. 61
$0.98
0.64
1.20
2.82
2.
Total unit cost for Vintage Records Company order
$13.72
3.
Selling price
Unit cost
$14.00
13.72
Gross margin per unit
$ 0.28
Gross margin as a percentage of sales:
0.02
or
2.0%
The selling price is not adequate. Only 2.0% of the total selling price remains to cover all operating expenses and to yield a profit. Management
should be sure to supply cost data to the Sales Department on a timely
basis. More attention should be paid to the cost of producing the product.
Department 60
4.
Prime
Costs
Department 61
Conversion
Costs
Direct materials
Direct labor
Overhead
$7.36
1.70
NA
Totals
$9.06
NA
Prime
Costs
Conversion
Costs
NA
$1.70
1.84
$0.98
0.64
NA
$0.64
1.20
$3.54
$1.62
$1.84
15-20
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
P9. Unit Costs in a Service Business
1. Cost per patient day:
Equipment usage
Doctors' care
Special nursing care
Regular nursing care
Medications
Medical supplies
Room rental
Food and services
(
(
(
2
4
24
×
×
×
$360
$85
$28
$ 180
720
340
672
240
150
350
140
)
)
)
$2,792
Total cost per patient day
2. and 3. Billing per patient day:
Cost
Equipment usage
Doctors' care
Special nursing care
Regular nursing care
Medications
Medical supplies
Room rental
Food and services
Totals
$ 180
720
340
672
240
150
350
140
2. Normal
Billing*
×
×
×
×
×
×
×
×
$2,792
1.40
1.40
1.40
1.40
1.40
1.40
1.40
1.40
3. Industry Average
Billing Approach
$ 252
1,008
476
941
336
210
490
196
×
×
×
×
×
×
×
×
1.30
1.50
1.40
1.50
1.50
1.50
1.30
1.25
$3,909
$ 234
1,080
476
1,008
360
225
455
175
$4,013
*Rounded to nearest dollar
4.
On the surface, the new approach seems to yield more revenue. However, the rates
used to compute the new cost per patient day were industry averages. They may not
be representative of Everymans Hospital's immediate competition. Before adopting
the new rate, the controller should compare it to rates charged by other hospitals in
the area.
15-21
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P10. Professional Ethics
1.
It would be wrong for Han and Smith to keep quiet about the matter. They too might
have an opportunity for promotion, and recognition of their successful suggestions
would be to their advantage. Their boss has committed an unethical act and should
not be considered for any future managerial position. He is dishonest and has put his
own gain ahead of the interests of his subordinates and the company. If their boss refuses to disclose his fraudulent act, Han and Smith should take the matter to their
boss's superior.
2.
The boss has committed an unethical act and should have agreed to explain the situation to the vice president of production. He should have identified Han and Smith as
the authors of the suggestions and indicated that the bonus should be distributed to
them.
15-22
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Cases
C1. Conceptual Understanding: Cost Recognition
Note to Instructor: This assignment should produce many different descriptions of processes and lists of costs. Students are very familiar with fast-food restaurants, but few will
have observed such operations closely or thought about the costs incurred by restaurants.
A few of the many examples students will identify are shown below. Expect debates over
the proper recognition of many items.
Traceability
to Product
Cost
Behavior
Value Attribute
Financial
Reporting
Bread
Meat
Condiments (mustard, catsup)
Direct
Direct
Indirect
Variable
Variable
Variable
Value-adding
Value-adding
Value-adding
Product
Product
Product
Depreciation of cooking
equipment
Cook's wages
Counter clerks' pay
Janitorial wages
Manager's salary
Insurance
Property taxes
Indirect
Direct
Indirect
Indirect
Neither
Neither
Neither
Fixed
Variable
Variable
Fixed
Fixed
Fixed
Fixed
Value-adding
Value-adding
Value-adding
Value-adding
Non-value-adding
Non-value-adding
Non-value-adding
Product
Product
Product
Product
Period
Period
Period
Depreciation of playground
equipment
Neither
Fixed
Value-adding
Period
Sample Costs
15-23
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
C2. Business Communication: Management Decision about a Supporting Service Function
1.
2.
a.
Information about the gardening activities of your department would include the
cost of supplies, labor, and depreciation and the maintenance costs for equipment
for those activities only.
b.
This information is relevant because it can help in making a variety of decisions
about the department. In this case, the information used in your report will help
in making a decision about the future operations of your department. The information could also help you to identify areas of waste, to budget next year's activities, or to evaluate manager and employee performance.
c.
Most of this information can be obtained from the Accounting Department. You
may also keep daily schedules and records of activities performed by specific employees. This nonfinancial information could help you to calculate the total costs
for these activities. Human Resources has information about your employees, too.
d.
You would need to ask the president when she would like your report and obtain
the information in time to meet her deadline.
The president will probably be satisfied with a general cost report showing total costs
for each expense item. The following report and cost items are suggested.
Grounds Maintenance Department
Cost Report for Gardening Activities
For the Year Ended December 31
Supplies used
Gardening labor
Gardening tools
Depreciation expense, garden equipment
Maintenance expense, garden equipment
Scheduling and other administrative labor expense
$xxx
xxx
xxx
xxx
xxx
xxx
Total costs for gardening activities
$xxx
15-24
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
C2. Business Communication: Management Decision about a Supporting Service Function
(Concluded)
If you were asked to analyze your department's costs in order to reduce waste, you
could prepare more detailed reports. The department's total costs could be split into
smaller groups of costs. For example, you could separate the costs by areas worked
(buildings, grounds, entrances, and recreational facilities) to find the costs associated
with maintaining each area. Or you could separate the costs by activity (gardening
and upkeep of land improvements) to determine the costs associated with performing
each activity. The format of these reports would be different from the one above. You
would provide a column of costs for each area or activity and rows for different groupings of expenses. This additional detail would help you identify problem areas and
waste more easily.
3.
Maintenance Expense—Garden Equipment would be:
a.
A direct cost to the Grounds Maintenance Department
b.
A period cost to the company
c.
A variable cost based on the use of the equipment
d.
A nonvalue-adding activity, because it does not directly add value to the company's business of providing insurance services
(Note to Instructor: Students may argue that it adds value indirectly because it provides pleasing views that improve employee morale, which adds value to the service.)
e.
An actual cost
15-25
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
C3. Conceptual Understanding: Management Information Needs
H&Y Drug Corporation
Statement of Cost of Goods Manufactured
For the Month Ended April 30
1.
Cost of direct materials used*
Direct labor
Overhead
Total manufacturing costs
Add work in process inventory, beginning
Total cost of work in process during the month
Less work in process inventory, ending
$ 642,900
160,000
303,500
$1,245,200
127,200
Cost of goods manufactured
$1,118,000
$1,106,400
138,800
*Cost of direct materials used: $258,400 + $612,600 – $228,100 = $642,900
H&Y Drug Corporation
Income Statement
For the Month Ended April 30
Sales
Cost of goods sold:
Finished goods inventory, beginning
Cost of goods manufactured
Cost of finished goods available for sale
Less finished goods inventory, ending
Cost of goods sold
Gross margin
Operating expenses:
General and administrative expenses
$2,188,400
$ 111,700
1,118,000
$1,229,700
114,100
1,115,600
$1,072,800
362,000
$ 710,800
Operating income
15-26
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
C3. Conceptual Understanding: Management Information Needs (Concluded)
2.
The total manufacturing costs are the costs associated with production activities for
the month. Some of those costs will attach to units completed during the month. The
remainder will attach to units still in the production process and will be summarized
in the ending balance of the Work in Process Inventory account at April 30.
The cost of goods manufactured is the total of all manufacturing costs associated with
completed units of product. It includes some of the total manufacturing costs for April,
as well as costs associated with production started in an earlier period but finished in
the current period. The costs associated with production in an earlier period are reflected in the Work in Process Inventory account on March 31 and are included in cost
of goods manufactured for April because the units were completed in April.
3.
4.
If you want to know the profitability of a product line, then you must obtain the following information for that line:
a.
Direct materials: Quantity of materials used, materials price
b.
Direct labor: Direct labor hours worked, direct labor wage rate
c.
Overhead costs associated specifically with the production of each product line
d.
Other costs that may be directly traceable to the product: special shipping, storing,
and moving costs; import duties, tariffs, and taxes; and advertising and sales costs
a.
product cost
b.
product cost
c.
period cost
d.
period cost
e.
period cost
15-27
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
C4. Interpreting Managerial Reports: Financial Performance Measures
1.
a.
This Year
Amount
Last Year
Ratio
Amount
Cost of direct materials used
Direct labor
Total overhead
$ 983,860
571,410
482,880
48.3%
28.0%
23.7%
$ 962,260
579,720
452,110
Total manufacturing costs
$2,038,150
100.0%
$1,994,090
Ratio
48.3%*
29.1%
22.7%
100.0%
*Adjusted for total of percentages to equal 100.0%.
b.
This Year
Amount
Sales salaries and commissions expense
Advertising expense
Other selling expenses
Administrative expenses
Last Year
Ratio
Amount
Ratio
$ 394,840
116,110
82,680
242,600
13.4%
3.9%
2.8%
8.2%
$ 329,480
194,290
72,930
195,530
10.6%
6.3%
2.4%
6.3%
$ 836,230
28.4%*
$ 792,230
25.6%
$2,942,960
100.0%
$3,096,220
100.0%
Total selling and administrative expenses
Sales
*Difference due to Excel rounding.
c.
This Year
Amount
Last Year
Ratio
Amount
Ratio
Gross margin
$ 946,675
32.2%
$1,056,550
34.1%
Net income
$ 37,148
$2,942,960
1.3%
100.0%
$ 119,919
$3,096,220
3.9%
100.0%
Sales
15-28
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
C4. Interpreting Managerial Reports: Financial Performance Measures (Concluded)
2.
a.
Total manufacturing costs increased from $1,994,090 last year to $2,038,150 this
year. As a percentage of total manufacturing costs, total overhead costs increased
while the cost of direct materials remained constant. Direct labor decreased. However, overall, total manufacturing costs changed little between years. Since sales
declined from last year to this year, efforts should be made to increase sales and
control overhead costs.
b.
Total selling and administrative expenses increased from $792,230 last year to
$836,230 this year while sales decreased. As a percentage of sales, sales salaries
and commissions expense and administrative expenses increased and advertising
expense decreased. Each account should be analyzed to determine the causes
of the changes.
c.
Gross margin decreased from 34.1 percent to 32.2 percent because of the increases in total manufacturing costs in the face of declining sales. Total selling
and administrative expenses also increased as a percentage of sales, from 25.6
percent to 28.4 percent. Although the company spent more for both selling and
administrative expenses, sales still declined. The cost-effectiveness of those expenditures should be evaluated.
Because inflation is evident in the increase in costs, management should review
the company's pricing structure.
Another possibility is that the volume of unit sales changed little between years,
but the selling price per unit dropped significantly. Therefore, the decline in gross
margin from 34.1 percent last year to 32.2 percent this year probably resulted from
a decline in unit selling price because unit cost appeared to change little.
3.
As mentioned in part 2, there may be changes in the volume and unit selling price of
units sold per period. Also, given that income has been declining since last year, perhaps ratios should be computed for a five-year period. Long-run trends may reveal
fundamental changes in the nature of the business that may require action more drastic than just controlling costs. For example, there may be fundamental changes in
unit selling price and the costs of direct materials, the cost of direct labor, or the sales
potential of the company's products.
Other ratios that might be examined are inventory turnover ratios, ratios of individual
overhead costs to direct labor hours and to total overhead costs, ratios of selling expenses to sales, and computations of percentage increases in each overhead cost
and operating expense.
15-29
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C5. Ethical Dilemma: Preventing Pollution and the Costs of Waste Disposal
At issue is Lake Waburg Power Plant's responsibility to a group of individuals and communities that could be negatively affected by the improper disposal of radioactive waste.
Improper disposal could harm employees, members of the community, members of society, and investors in the plant.
Lake Waburg must be aware of any EPA regulations that could affect its operations. In
this case, the EPA's position is that a company is responsible for any waste it creates. The
responsibility extends to the disposal of the waste and covers the life of the waste, which
can be unlimited. If damages or problems arise because of inappropriate disposal, Lake
Waburg will be held liable. Therefore, Lake Waburg Power Plant must monitor Willis's
disposal of the waste. Site inspection, evaluation of complaints noted in public records,
and assessment of Willis's stability are important controls over improper disposal.
Sunny cannot take Guy's advice to ignore the waste disposal costs. Besides monitoring
the condition of the waste at the disposal site, Sunny must record the full cost of the waste
as a cost of the product. Normally, the cost of waste disposable would be a reimbursable
cost included in the rate base calculation that would benefit shareholders by increasing
profits. This includes the process costs associated with the creation of the waste and the
disposal costs of the waste. The ongoing monitoring of the waste disposal plant should
also be included as a cost of waste disposal.
15-30
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C6. Continuing Case: Cookie Company
2.
a.
The mission statement students select indicates whether a student's cookie business will focus on low cost, branded quality product, or a specific need. Performance objectives and measures of success will vary depending on which of the
three statements is selected.
b.
Student answers to 2a should agree with their answers to 2b. The mission statement "To provide cheap cookies…" matches a cost focus. The mission statement
"Our mission is to make the best…" matches a quality focus. The mission statement "Handmaking the best in custom..." matches to satisfying a specific need
focus.
c.
Student mission statements should be unique and express in as few words as
possible their company's fundamental goal or ideal state.
3.
Students should list their main products, primary customers, and where they will operate their business.
4.
Strategic objective: To not have a retail operation but to rely solely on the Internet to
market products
Tactical objective: To expand the ecommerce website to include 20 varieties of
cookies over the next five years
Operating objective: To keep expenses low and generate enough revenues during
the first two months of operations to have a positive cash flow by the third month
Business plan: To develop a complete list of goals, objectives, procedures, and policies relating to how to find, buy, store, sell, and ship goods and collect payment
Budget: To list expected revenues and expenses for the first six months of operations
5.–7.
Company name should be unique for each team.
The answers to this case will vary depending upon the management decisions
each cookie company makes. Each team, at a minimum, should supply all the required information.
8.
Each team should answer these questions with supporting reasons. Types of overhead
might include utilities, depreciation, supervisor's salary, or rent.
15-31
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